The Bond Market: An Inflation-Targeter's Best Friend

Andrew Rose

No 10124, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper explores the relationship between inflation and the existence of a publicly-traded, long-maturity, nominal, domestic-currency bond market. Bond holders suffer from inflation and could be a potent anti-inflationary force; I ask whether their presence is apparent empirically. I use a panel data approach, examining the difference in inflation before and after the introduction of a bond market. My primary focus is on countries with inflation targeting regimes, though I also examine countries with hard fixed exchange rates and other monetary regimes. Inflation-targeting countries with a bond market experience inflation approximately three to four percentage points lower than those without a bond market. This effect is economically and statistically significant; it is also insensitive to a variety of estimation strategies, including using political and fiscal instrumental variables. The existence of a bond market has little effect on inflation in other monetary regimes, as do indexed or foreign-denominated bonds.

Keywords: Currency; Domestic; Effect; Empirical; Fixed; Long; Maturity; Nominal; Panel; Risk (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-mon
References: View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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